Are Mutual Funds For You?

Mutual funds may be a suitable alternative for investors with small sums of money to invest because funds pool the investments of many investors, effectively giving each mutual fund shareholder an interest in the whole pool and creating valuable diversification. 

Investors with more significant assets to invest, however, have to consider the significant drawbacks to investing in funds.  First and foremost, in buying a mutual fund you are granting authority to make critical investment decisions on your behalf to individuals you'll never know and, perhaps more importantly, will never know you or your investment needs.

In addition, investors usually consider a fund’s historic track record as evidence of the fund manager’s expertise.  But few if any investors check to see if the same person or team responsible for the historic track record is now managing the fund.

There is also the issue of costs and expenses. Funds have expenses buried in them and that comes out of your return. I spoke to a prospective client recently who owned funds which had outrageous expense ratios of 2.6%.  Fund companies use that money to market their funds to future investors.  Do you really want your investment dollars to pay for the mutual fund company's costs of attracting new investors?  Should your portfolio pay costs of printing the fund company's brochures and postage? Did the person selling you the fund get paid a commission?  If so, that may be buried in the expense ratio, too.

Another downside is that these pools of money are so large that the portfolio managers are forced to hold many more companies than they otherwise would if purely investment considerations were driving the process. Because of that, there is often overlap in the stocks owned by separate mutual fund portfolios.  You thought owning several funds meant you were diversified, but in reality you unwittingly hold many of the same stocks across several of your mutual fund portfolios.

The bottom line is that funds are comprised of either stocks or bonds (or some funky derivative of the same.) Someone’s got to make reasonable decisions about which particular stocks or bonds or poised to do well.  It might as well be you or at least someone who knows you and your needs.

 

Why allow someone you don’t know to have such an important role in your financial security?

 

Susan